How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James
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How & Why California isDifferent When it Comes toTrade Secrets and Non-Competes
• Statutory Creation – California Uniform TradeSecrets Act (“CUTSA”).
• California Civil Code § 3426.1(d) defines a tradesecret as:
• [I]nformation, including a formula, pattern,compilation, program, device, method, technique,or process, that:(1) Derives independent economic value, actual or
potential, from not being generally known to the publicor to other persons who can obtain economic value fromits disclosure or use; and
(2) Is the subject of efforts that are reasonable under thecircumstances to maintain its secrecy.
• Altavion, Inc. v. Konica Minolta Sys. Laboratory, Inc., 226 Cal. App.4th 26 (1st Dist. 2014):
• “In conclusion, it is clear that if a patentable idea is kept secret, theidea itself can constitute information protectable by trade secret law. Inthat situation, trade secret law protects the inventor's ‘right to control thedissemination of information’ [citation omitted]—the information being theidea itself—rather than the subsequent use of the novel technology,which is protected by patent law (Cadence Design Systems, Inc. v.Avant! Corp., supra, 29 Cal. 4th at p. 222, 127 Cal.Rptr.2d 169, 57 P.3d647). In other words, trade secret law may be used to sanction themisappropriation of an idea the plaintiff kept secret.” (Emphasisadded.)
• Customer lists long regarded as potential trade secrets. See, e.g.,: Reevesv. Hanlon, 33 Cal. 4th 1140, 1155-56 (2004); Morlife, Inc. v. Perry, 56 Cal.App. 4th 1514 (1997)
• Cellular Accessories For Less, Inc. v. Trinitas LLC, Case No. CV 12–06736D, DP (SHx), 2014 WL 4627090 (C.D.Cal. September 16, 2014):
• “The chief factual issue in determining whether a customer list is a tradesecret is the amount of effort involved in compiling it. If the methodsused to compile the information are ‘sophisticated,’ ‘difficult,’ or‘particularly time consuming,’ that tends to show that it is a trade secret.”
• LinkedIn contacts may be trade secret—court found triable issues of factas to whether such contacts were “made public”
What are Reasonable Efforts to MaintainSecrecy? (Cont.)
• Recent example is Direct Tech., LLC v. Electronic Arts,Inc., Case No. CV 10-1336 AG (August 4, 2014)(summary judgment on claim of misappropriation oftrade secrets)• Court rejected Plaintiff’s evidence that it had taken reasonable
efforts to maintain secrecy, which included:
• Substantial communication with defendant about a non-disclosureagreement
• Third party developer “knew it would be inappropriate to send adesigner’s ideas to a competitor”
• Defendant told its employees to keep thing confidential
• Defendant asked third developer to have Plaintiff sign a confidentialityagreement
(1) Acquisition of a trade secret of another by a person who knowsor has reason to know that the trade secret was acquired byimproper means.
(2) Disclosure or use of a trade secret of another without express orimplied consent by a person who:
(A) Used improper means to acquire knowledge of the trade secret;
(B) At the time of disclosure or use, knew or had reason to know thathis or her knowledge of the trade secret was: (i) Derived from orthrough a person who had utilized improper means to acquire it; (ii)Acquired under circumstances giving rise to a duty to maintain itssecrecy or limit its use; or (iii) Derived from or through a person whoowed a duty to the person seeking relief to maintain its secrecy orlimit its use;
(C) Before a material change of his or her position, knew or had reasonto know that it was a trade secret and that knowledge of it had beenacquired by accident or mistake.
• Non-exclusive definition, “includes theft, bribery,misrepresentation, breach or inducement of abreach of a duty to maintain secrecy, orespionage through electronic or other means.”
• However, use of the word “includes” does not limitwhat may constitute “improper means” to those itemslisted in the definition at Civil Code Section 3426.1(a).
• “Reverse engineering or independent derivationalone shall not be considered improper means.”Civil Code § 3426.1(a).
• Plaintiff has burden of proof, including negating independentdevelopment and reverse engineering.• “Reverse engineering or independent derivation alone
shall not be considered improper means.” Cal. Civ. Code§ 3426.1(a).
• Sargent Fletcher, Inc. v Able Corp., 110 Cal. App. 4th1658, 1669 (2003).
• Not an issue for patent protection.• Independent or reverse engineered derivation of thing
covered by valid patent may still constitute patentinfringement.
• In the digital age there are many tools/available to badactors…
California Court Extends Protections To“Silent Whistleblowers”
• Diego v. Pilgrim United Church of Christ, 231Cal.App.4th 913 (2014):
• A prime California public policy is that employers cannot retaliateagainst whistleblowers—individuals who have reported suspectedunlawful employer conduct.
• Employee claimed she was retaliated against and terminated becauseemployer mistakenly believed she complained to the Dept. of SocialServices
• Court of Appeal clarified that Section 1102.5, even in its pre-amendedversion, forbids employers to terminate “perceived whistleblowers,”even if that belief is mistaken
• Case reinforces the point that employers should documentperformance issues and disciplinary decisions to help support laterdecisions to discipline an employee.
Imputed, Vicarious and Joint Liability forMisappropriation
• “Corporate shareholders,officers, and directors canbe held personally liablefor misappropriation whenthey knew or had reasonto know about but failedto put a stop to tortiousconduct.” PMC, Inc. v.Kadisha, 78 Cal. App. 4th1368, 1387 (2000)
• One who has sold a trade secret may maintain alawsuit for pre-sale misappropriation.
• Reaffirms trade secrets as tangible property rights.
• Jasmine Networks, Inc. v. Superior Court (MarvellSemiconductor, Inc.), 180 Cal. App. 4th 980 (2009) (suggestinglawsuit by purchaser seeking indemnity may satisfy damagesrequirement).
• Plaintiff’s complaint must put defendant(s) onnotice of the subject matter of the trade secret.
• Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244 (1968).(Leading authority.)
• Plaintiff “should describe the subject matter of the tradesecret with sufficient particularity to separate it from mattersof general knowledge in the trade or of special knowledge ofthose persons who are skilled in the trade.”
• The plaintiff must provide the defendant “reasonable noticeof the issues which must be met at the time of trial” and“reasonable guidance in ascertaining the scope ofappropriate discovery.”
• Unlike other jurisdictions, California trade secretplaintiffs must identify allegedly misappropriatedtrade secret(s) with reasonable particularity prior tocommencing discovery.
• CCP § 2019.210, which extends the Diodesidentification requirement to discovery, provides:
• Pending compliance with CCP § 2019.210, discoverystayed on each cause of action that “hinges upon”trade secret misappropriation. Advanced ModularSputtering, 132 Cal. App. 4th 826, 836 (2005).
• Promotes well-investigated claims and dissuades the filingof trade secret complaints that have no merit;
• It prevents plaintiffs from conducting “fishing expeditions” indiscovery as a means to obtain defendant’s trade secrets;
• It assists the court in framing the appropriate scope ofdiscovery; and
• It enables defendants to form complete and well-reasoneddefenses and ensures that defendants need not wait untilthe eve of trial to effectively defend against trade secretclaims.
• Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp.2d 980, 985 (S.D. Cal. 1990).
Satisfying the “reasonable particularity” requirement:
• Plaintiff “must make some showing that is reasonable, i.e.,fair, proper, just and rational . . . to identify its alleged tradesecret in a manner that will allow the trial court to control thescope of subsequent discovery, protect all parties‘ proprietaryinformation, and allow them a fair opportunity to prepare andpresent their best case or defense at a trial on the merits.”Brescia v. Angelin, 172 Cal. App. 4th 133, 145 (2009).
• Must be sufficient to permit defendant to discern boundariesof the trade secret. Perlan Therapeutics, Inc. v. SuperiorCourt, 178 Cal. App. 4th 1333, 1343 (2009).
• A complainant may recover damages for the actual losscaused by misappropriation.
• Unjust enrichment
• A complainant also may recover for the unjustenrichment caused by misappropriation that is not takeninto account in computing damages for actual loss.
• Reasonable royalty
• If neither damages nor unjust enrichment caused bymisappropriation are provable, the court may orderpayment of a reasonable royalty for no longer than theperiod of time the use could have been prohibited.
• What is the affect of CUTSA on other claimsrelating to trade secret misappropriation?
• Civil Code § 3426.7 provides:
• (a) Except as otherwise expressly provided, thistitle does not supersede any statute relating tomisappropriation of a trade secret, or any statuteotherwise regulating trade secrets.
• (b) This title does not affect:
• (1) contractual remedies, whether or not basedupon misappropriation of a trade secret,
• (2) other civil remedies that are not based uponmisappropriation of a trade secret, or
• (3) criminal remedies, whether or not basedupon misappropriation of a trade secret.
• However, CUTSA does preempt “common lawclaims” “based upon the same nucleus of factsas the misappropriation of trade secrets claimfor relief.” K.C. Multimedia v. Bank of AmericaTech., 171 Cal. App. 4th 939, 958 (2009).
• Silvaco Data Systems v. Intel Corp., 184 Cal. App.4th 210, 224 (2010) (affirming preemptive affect ofCUTSA.
• Split between California state and federal courtsover when a plaintiff must choose to pursueeither a claim under CUTSA or a common lawtheory; jurisdictions vary as to the applicationand breadth of preemption.
• Current hot issue in this area is whether CUTSApreemption extends to misappropriation ofconfidential information that is not trade secret.• Sunpower Corporation v. Solarcity Corporation, Case
No. 12-CV-00694-LHK (N.D. Cal. December 11,2012):
• Surveying CUTSA preemption decisions and concludingCUTSA preempts claims based on the misappropriationof information that is confidential but does not rise to thelevel of trade secret.
• Relies heavily on Silvaco to disregard otherwisecontrolling 9th Circuit authority.
Preemption – Does It Apply toConfidential Information?
Preemption – Does It Apply toConfidential Information? (Cont.)
• No California Supreme Court decision has clearlyruled upon whether CUTSA’s claims preemptionapplies if the information does not qualify fortrade secret protection.
• Including where the confidential information is aprotectable interest other than a trade secret.
• However:• Breach of non-disclosure of confidential information
Preemption – Does It Apply toConfidential Information? (Cont.)
• Tort theory of recovery for misuse of confidentialinformation may be limited if the “confidentialinformation” at issue is the same as the trade secretsand a trade secret misappropriation claim is alleged.
• Continue to use confidential information NDAs despiteapparent ambiguity in law, but tailor them to protectnon-public and valuable information, but beware ofCal. Business & Professions Code § 16600arguments.
Ninth Circuit Jeopardizes Broad “No Re-Hire Clauses in California
• Golden v. CaliforniaEmergency PhysiciansMedical Group (9th Cir. April8, 2015)
• Divided Ninth Circuit panel heldthat a “no re-hire” provision in asettlement agreement could,under certain circumstances,constitute an unlawful restraintof trade under California law.
• Court suggested entiresettlement agreement may bevoid due to no re-hire provision
Non-Competition Agreements/Restrictive Covenants – California
• California has a strong public policy againstnon-competition agreements and othercovenants that impair employee mobility andcompetition.
• Such agreements are presumptively void.
• Business & Professions Code § 16600 et seq.
• Section 16600 provides:
• “Except as provided in this chapter, every contractby which anyone is restrained from engaging in alawful profession, trade, or business of any kind isto that extent void.”
• California Supreme Court held in Edwards v.Arthur Andersen, 44 Cal. 4th 937 (2008):
• “Noncompetition agreements are invalid under section16600 in California even if narrowly drawn, unlessthey fall within the statutory exceptions of section[s]16601,16602, or 16602.5.”
• Section 16601 – non-competes enforceablewhen executed in connection with the sale of abusiness.• Fillpoint, LLC, v. Maas, 208 Cal. App. 4th 1170 (2012)
• Specialty video game publisher employee signs twoseparate agreements, agrees to stay on for an additional3 years.
1. Stock purchase agreement: 3 year non-compete fromdate of sale.
2. Employment agreement: 1 year after termination/expiration of agreement.
• Historically California courts have enforced non-competes to the extent necessary to protect tradesecrets.
• The Retirement Group v. Galante, 176 Cal. App. 4th 1226(2009) (“Court may enjoin tortious conduct...banning theformer employee from using trade secret information” notbecause the conduct falls within a statutory exception to16600, but “because it is wrongful independent of anycontractual undertaking.”).
• Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 577(2009) (“[a]lthough we doubt the continued viability of thecommon law trade secret exception to covenants not tocompete, we need not resolve the issue here.”).
• Pyro Spectaculars, Inc. et al. v. Souza, Case No. 12-CV-00299-GGH (E.D. Cal. March 21, 2012).
• After expressly recognizing the bar against non-competitionagreements set forth in section Cal. Bus. & Prof. Code section16600, the court issued a time-limited preliminary injunction thatallowed lawful competition, but which prohibited use of plaintiff’strade secrets to compete.
• Defendant’s bad acts (alleged surreptitious downloading ofPlaintiff’s information, use of wiping software to cover his tracks,and failure to account for several thumb drives notwithstandingthe court’s order that he do so) helped provide justification forrelief.
• Pyro Spectaculars, Inc. et al. v. Souza, Case No. 12-CV-00299-GGH (E.D. Cal. March 21, 2012) (cont.).
• Trade secrets committed to memory for purpose ofmisappropriation recognized as misappropriationjustifying injunction (defendant’s probablemisappropriation thus far has “[s]o tainted defendant’sbase of knowledge that it would be very difficult, at leastover the next several months, for defendant to separatehis general pyrotechnics information and skills from[Plaintiff’s] legitimate trade secrets when competing with[Plaintiff].”).
• Edwards v. Arthur Andersen – CaliforniaSupreme Court expressly declined to reachapplicability of so-called “trade secretexception” to § 16600 because issue not raisedon appeal.
• Some non-compete agreements contain a choice of law provisioncalling for the application of the law of a state other than Californiaand/or forum selection clauses.
• Where applying the other state’s law would result in theenforcement of a non-compete clause in contravention ofCalifornia public policy, California courts have refused to applythe choice of law clause.
• The Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App.4th 881 (1998)
• Arkley v. Aon Risk Services Co. Inc., 2012 WL 2674980 at *3(C.D. Cal., 2012).
• Verdugo v. Alliantgroup, L.P (Cal. Ct. Appeal, May 28,2015)
• Held that if a dispute involves unwaivable claims under California’sLabor Code, the employer seeking to enforce the forum selectionclause bears the burden of showing that litigating the claims in thecontractually designated forum “will not diminish in any way thesubstantive rights afforded … under California law.”
• Class action lawsuit alleging Labor Code violations involving unpaidovertime, meal and rest breaks, wage statements, and timelytermination pay.
• “Alliantgroup could have eliminated any uncertainty on which law aTexas court would apply by stipulating to have a Texas court applyCalifornia law in deciding Verdugo’s claims, but Alliantgroup failed todo so.”
• Ruiz v. Affinity Logistics Corp., 667 F. 3d 1318 (9th Cir. 2012)(refusing to apply Georgia choice of law provision in connectionwith non-competition agreement).
• Meras Engineering v. CH20, Inc., 2013 WL 146341 at *7 (N.D.Cal., 2013). (Federal courts in California have traditionallyfollowed this approach as well.)
• Federal district courts in California have increasinglyelected to enforce forum selection clauses eventhough it would require a California worker to travel toanother state and be subject to enforcement of thenon-complete agreement. The Atlantic Marinedecision has probably accelerated this trend.
• Atlantic Marine Construction Co., Inc. v. U.S. Dist. Ct. for Western Dist. ofTexas, 134 S.Ct. 568 (December 2013)
• In the absence of the forum selection clause being procured by impropermeans (e.g., duress, coercion etc.), the forum selection clause should bepresumed valid
• The transferee court’s law, not the transferor court’s law, should apply
• The transferor court could still theoretically chose to apply Californiasubstantive law, but as a practical matter this may be unlikely
• Often, this analysis applies in the context of transfer motions wherefederal common law doctrine such as the “first to file” rule is also at playand may affect the courts’ analyses
• Marcotte v. Micros Sys., Inc., No. C 14–01372 LB, 2014 WL4477349, at *8 (N.D. Cal. Sept. 11, 2014) (“[A] party challengingenforcement of a forum selection clause may not base itschallenge on choice of law analysis.”) (post-Atl. Marine)
• Rowen v. Soundview Commc’ns, Inc., No. 14-CV-05530-WHO,2015 WL 899294 (N.D. Cal. Mar. 2, 2015) (Granting motion totransfer California action based upon Georgia forum selectionlaw clause and rejecting arguments that transfer would violateSection 16600).
• Ryan v. Microsoft Corp., No. 14-CV-04634-LHK, 2015 WL1738352, at *5 (N.D. Cal. Apr. 10, 2015) (“arising out of” acontract are narrower than those covering disputes “arising out ofor relating to” a contract”).